Our software analysts at Morgan Stanley, Steve Daly, CEO of Instructure, thank you so much for joining us. Research disclosures: to start, for important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Thank you again for joining us. Wanted to start with a little bit of an overview. If you could kind of lay out some of the differentiation of Canvas, your core product in the learning management system space, how's it differentiated versus competition, and really what makes it the consistent share gainer that we've seen since forever. Yeah. Yeah. So it is. Canvas LMS is our core product. We really came into the market as the first cloud-native solution for learning management systems. And we've been able to kind of go from, you know, in 2010, no market share, to, as you said, market share leader. About almost half of all U.S. higher ed students are using our Canvas LMS today, as well as about a third of all U.S. school districts. And the way that we've done that really is we started, first of all, in a fundamentally different approach to designing the system, where we were really focused on the students and the learners, whereas historically, LMSs have really been focused on administrators and helping them manage classrooms, things like that. Because of that, we consistently win based on our user interface and how easy it is to use, that it's really designed around the workflows that students and teachers need. The fact that it's scalable, you know, we went from about 1 million concurrent users prior to the pandemic, and four months later, we had over 6, almost 8 million concurrent users on the platform, and it stayed up and running. And that's really important, particularly as the LMS has become kind of that critical infrastructure for teaching and learning, right? You can't have it go down when they're trying to get finals or midterms or things like that. And so that reputation as kind of that critical infrastructure, as well as over time, because we have become the leader in the market, we have the largest ecosystem that's integrated into our platform. So we have almost 900 partners that have integrated across the LMS, as well as other parts of the platform, which gives a lot of flexibility. We have a user community of over 2 million people, the largest user community. So we start to see these network effects that bringing more people onto the platform attracts even more people. And so we continue to see that momentum build, and that flywheel continue to spin faster and faster from a share gain perspective. Perfect. Good overview. Actually, I want to hit on AI upfront. You have a lot of data. You have assessments products, analytics products. Can you articulate your AI strategy? Like, where are you on that journey? Yeah. So there's two things that we really have focused on. One is, first of all, we believe that AI will help us become much more efficient in how we, you know, build our products. But also, when you talk about assessments, building some of that content that has historically been a very human-intensive process for us, we can offload a lot of that to technology through artificial intelligence. But where we really are focused is on how do we help teaching and learning? And we've been very thoughtful about this because when it comes to education, there, you know, obviously, privacy is a huge issue, particularly student privacy. And so our focus has been, first and foremost, you know, we've worked really closely with our institutions so that we've built the infrastructure inside of the platform that allows us, as well as our partners, that 900-plus partners that are integrated, access to the data in a way that doesn't compromise student privacy. And then our focus has been on how do we make the teachers more effective and efficient? Teacher shortages is a perennial problem that we've seen in education. So how do we help them become much more productive as teachers? Another area is around how do we help students in the process of learning? And we've chosen to actually partner. We have a partnership with Khan Academy, with our Khanmigo tutor, to help students, as well as then how do we make it much more efficient for the students to be able to or the teachers to be able to provide personalized learning, to be able to customize the curriculum or the help that they provide for the individual student and where they are on their learning journey? That's great. And like, where are we in some of those initiatives as far as what's available, what's being monetized, and how? Yeah. So the infrastructure is well on its way. We just announced a case study that we did with Clemson and a company called Praxis AI, where they're using the tutor software inside of the classroom, as well as we're in beta with a number of features, some of them related to course content creation to help teachers create content more efficiently, the ability for students and teachers to be able to find content across courses, as well as a product that allows teachers and administrators to access this treasure trove of data, if you will, to help answer questions with natural language. And so rather than having to figure out how to query the database, they can just ask the question, "Tell me who's at risk in my classroom and who should I be focusing on?" And it will, using Generative AI, automatically bring back the data that gives them the ability to really focus on the students that they need to focus on. Got it. Before we dig into some of the different segments, I want to focus on growth overall and organic growth, really how you're thinking about, in the medium term, what the growth profile on this business should be. We talked about market share gains. There's continued momentum there, but hoping you could lay out some of the key drivers of growth and how to think about the contribution from the different segments. Yeah. So first of all, I mean, if you look at the overall U.S. student base, we are serving about a third of all students, you know, traditional students within the U.S. So there's still a lot more room for us to go win share and continue to gain market share with the LMS. But there are kind of four areas where we see, really, that are going to be our growth drivers in the medium term. One is international is still using a lot of open-source software. And so there's an opportunity for us to penetrate within the international markets, particularly with the LMSs as the lead product there. The second is that we have a portfolio of products today that if all we did was focus on selling those into our existing customer base, it's about a $1 billion TAM opportunity. And so, you know, I'll put a pitch in for our Investor Day next week. We're going to go into some details about how we're monetizing that. Invite you all to that, and you'll get to meet some of the key players on the management team that are driving those strategies to cross-sell into the existing base. But there are two kind of macro trends that we're taking advantage of into the future. The first is the learner has a lot more options of where they go for learning than they ever have. And this has been catalyzed by the pandemic, but also it's been a trend that has been going on for probably four or five years now, where students now don't necessarily always come for a four-year degree, and they're looking for options. And even when they come for a four-year degree, they're looking for an infrastructure at the university that gives them the flexibility to do some of their courses online, some of them in person, hybrid, those types of things. And so that, for us, is a key driver of opening up a lot more learners for us than just the four-year degree-seeking student that's coming out of high school. And so we've made a number of acquisitions. We've done some organic development from a product perspective, and then we've made some changes to our go-to-market to really go after that opportunity, which we believe is probably 3-4 times bigger than the traditional student opportunity that we're chasing, that we've been chasing historically. And then the final growth piece for us is, as I said earlier, we've got the largest partner base. We really have not monetized any of those relationships to date. So we have over 900 partners that have integrated, and we can provide a lot of value in visibility, as well as giving them feedback and telemetry data about how their technology is being used on our platform. There's opportunities that we believe are probably as big as the traditional education opportunity from a market-size perspective. So from the medium term, you know, from a growth perspective, we feel there's a lot of levers for us to pull from a growth perspective. Got it. Really, really interesting. Point number four on the partner base, probably something that most investors and analysts don't, you know, are not really thinking about. That's interesting. And then to hit maybe in reverse order, go through some of those growth drivers. On the non-traditional opportunity, do you have any customer case studies or success stories that could really highlight, like, what that looks like? And just thinking about how big that opportunity could be, what's the timing to realize it? What are some of the risks? Yeah. So that one is one that's, you know, we've worked with some of the early adopters in the education space. Arizona State is one of those examples where their actual traditional enrollment numbers have been pretty flat over the last decade. But when you look at the number of learners that they're reaching, it's almost an order of magnitude more than actually come on campus. And they use our technology to go reach those students. And so that's one example of a non-traditional learner. Again, that learner is going to come to Arizona State, and they're looking for a data science certificate, right? They're not trying to get their bachelor's degree in computer science, but they want that certificate so that they can either, you know, get a better job or they can get a job out of high school, perhaps. So that's one example. There is a segment that we have kind of opportunistically hit that we're organizing this year that we've organized around some dedicated go-to-market resources to go after, which is what we're calling professional learning. The best example of a customer that we have here is AWS Academy. Their job is to educate people on how to use AWS technology, right? We started piloting this in 2019 with, you know, several hundred learners on the platform. This last year, we just signed a contract for 1.2 million learners on the AWS Academy platform using our technology as the underlying to deliver that. So that's an example of an area, again, in that non-traditional space that we've kind of opportunistically hit with a higher ed sales team that we're now really focused on driving growth out of that. Perfect. So point number two was on the $1 billion opportunity back into the base. Maybe it would be helpful to go through North America higher ed, K through 12, and international. What are some of the most popular add-on products in each of those regions? What does it do from a financial perspective and economic impact? Sure. So again, it's a massive opportunity. From the products that we can sell or the suites of products that we can sell into, the lowest hanging fruit for us is selling we have a suite of products that helps an existing higher ed institution get to those online non-traditional students. And that's probably our lowest hanging fruit. The other thing that we're seeing a lot of demand for, we made an acquisition of a company called LearnPlatform, which is their whole value proposition and the suite of solutions we've built around it is to be able to give institutions visibility into what's being used in their environment, be able to understand the efficacy of those solutions in there to allow them to make decisions about what ed tech they're using in their environment. We're getting a lot of requests to bring that solution, which was targeted at K-12, into higher ed. So we have, you know, we have a suite of solutions there, which we call ed tech management, that we'll launch later this year into the higher ed space. On the K-12 side, we have a suite of assessment solutions, which really gives teachers real-time feedback about how a student is progressing against the standards that they're going to get tested against at the end of the year. And so that's a suite of products that we sell into K-12 only today. And it's a combination of technology and the content that I was talking about earlier on top of that. Those solutions, when they buy the full stack, tend to sell for about 2-3 times average selling price to the LMS. So there's a lot of value in those solutions. And so it's a big opportunity for us. And then the ed tech management piece. As we get to the end of ESSER funds, the stimulus funds that have been flooding the K-12 system over the last several years, there's a big demand to figure out what's working in the environment, if those dollars are going away. A lot of times, they're using more than one solution to solve the same problem. And there's about 2,600 apps that are used in a district every year. And so the ability to kind of rationalize that estate is becoming increasingly important. And that'll be a big driver for cross-sell for us in the medium term. Got it. So a follow-up on the ESSER funds, is there still a more direct tailwind in this last buying cycle before the ESSER funds roll out for, you know, Canvas? Or is it more related to, like, proving the efficacy of all the programs? Yeah. It's, you know, with the funds expiring, what we're seeing is districts are really using these funds this year for things that are non-recurring, particularly around services. So you know, training, implementation, professional development, those types of things. So from that perspective, it reduces some of the friction of getting our solutions into the environment. So from that perspective, there's a tailwind there. But we still really are focused on making sure that the states have ongoing appropriations for our technology because it is critical infrastructure. And they recognize they can't just walk away from it just because the ESSER funds went away. So I do think there'll be some tailwind for us. I don't think it'll be directly to purchase things like Canvas or some of the assessment solutions. But it'll be a nice backdrop for us. Got it. To round out a little bit of the conversation on K-12 before going to international, just where are we as far as the market adoption of paid LMS? We're now several years past COVID. Like, what types of schools are deciding now to pay for an LMS that didn't make that decision over the last several years? It really depends on the maturity of the schools and their technology maturity. So, you know, you'd be surprised that it really is not related. There's not a really tight correlation to size, for instance. It really comes back to where they are on their technology journey of digital transformation. And so there's still about 30% of the market that is using free tools, whether it's from publishers or, you know, maybe it's Google Classroom, those types of tools in the environment. For us, those are important that they use those because as teachers become more familiar with how to use technology in the classroom, as the organization as a whole matures, it creates an opportunity for us to go in and then sell them on the value of a true enterprise solution, right? When a district really wants to be able to have some consistency across and share content across the district, for instance, so teacher lesson plans, things like that, or they want to bring in other technologies, more integrated technologies, you know, like those 900 partners that we have, and do so in an integrated fashion, they want to be able to get some reporting and understand, you know, how are different schools within the district doing? That's when they'll be looking for a more robust and enterprise-grade LMS. Got it. Moving back to international, maybe if you could talk a little bit about the partner and the channel strategy in international markets. Yeah. So in the international markets, we have kind of a two-pronged strategy. One, we've identified markets that we want to go direct in. And we've been doing that for a while. We've had great success in Australia and New Zealand markets where, you know, we've got 30%+ market share there. UKI, we're in the 20% range. Nordics, we have 80% market share. So in those markets where we've really focused from a direct perspective, we've been seeing some success. And we've got some more new markets that we're going direct in. I think the big kind of medium-term opportunity for us is around the channel. And so we've made an investment. It's been a couple of years that we've made an investment in the channel. This last year, we've kind of refocused the channel efforts. We've identified partners that we can put more wood behind the arrow and kind of focus our efforts there. We brought in a new leader for channel. And so that's an area where for emerging markets, like for us, Japan's an emerging market just because it's, you know, you've got to have a local presence. You've got to have somebody that knows the market really well. Southeast Asia, India, Middle East, Africa are the areas where we're really doubling down on the channel strategy. Got it. In international markets, is there, like, a structural difference, whether it's budgets or the way that different countries think about academics that, you know, would, like, can we draw a line from the success you had in the U.S. to international markets? Or is there something structurally different about those markets where, you know, you might not see as widespread success? Yeah. There are a lot of markets that, you know, and first, you know, you know this, Josh, but we focus almost entirely on higher ed in international markets because a lot of the higher ed systems look a lot like the U.S. system. So from that perspective, yes, it's very similar. The needs are and the selling motion is very similar to what we've done in North America. We went through a rubric that said, you know, let's make sure that, one, the countries that we're going after, you know, there's good student-to-device ratios, that there's acceptance of cloud technologies in the environment, that there's good spend per student on education. And so it is the playbook that we've run in North America really does apply to a large part of the markets that we go after in international. Okay, great. So maybe bringing it all together and coming back to that organic growth, depending on some assumptions for the contribution from Parchment, organic growth as far as 2024 guidance, probably around 6%. I guess the question is, that's a deceleration from what we've been seeing. So what's causing that deceleration? And if you could point to any areas of conservatism. Yeah. So there is a, you know, coming out of the pandemic, we've kind of seen this, you know, this recalibration of demand, particularly in higher ed, where we kind of went through this spike. We saw it, we came out the other side. We weren't really sure what was happening with enrollments, right? There was a lot of noise in the numbers. We weren't sure what was happening with budgets because there were so much stimulus dollars. You know, kind of going into the 2023-2024 budget season, institutions really started to get visibility on what this is going to look like going forward. And so we've, you know, we've been, you know, we recognize that there's kind of this recalibration that's happening from a demand perspective. You know, we've actually taken the opportunity to position ourselves pretty well from a product perspective that I talked about earlier before, as well as make some changes to our go-to-market this year to try to address that demand. What it has done is it has slowed down those sales cycles. So we do see a deceleration this year. You know, to your point, it's kind of mid-single digits organic guide that we have out there. You know, now if you look at the ARR growth, it's kind of high single digits. So there is a little bit of noise in services and those non-recurring things, particularly as we ramp our channel and they do the services and we don't anymore. So, but we're kind of in that range. You know, I think that's, you know, we're confident in, you know, we're back in that high single digit, low double digit range from a medium-term growth perspective because of these different growth initiatives that we have. But it is kind of a temporary slowdown this year from that perspective. Now, you know, I do see we haven't built into the guidance, you know, for instance, we bought Parchment. We haven't built any cross-sell into our assumptions from guidance perspective. So that would be upside to the model from a conservatism perspective. And we'll update everybody as we go along throughout the year as we start to understand what that looks like better. So there are some areas of conservatism built into that. Great. That's helpful and good point on kind of the divergence between services growth and core ARR growth. Maybe on that point around Parchment and some of the cross-sell opportunities, would be a good time to talk about what that could look like. Yeah. So from Parchment, so Parchment is, they're the leading credentialing platform. So they do, you know, when you request a transcript, they're the underlying technology that makes that available, as well as other more richer credentials like certificates. And they become the record of learning, if you will, is how you should think about Parchment. But they also have technologies that help in the transition between educational journeys. So when you're going from high school to college, right? Some of it is you request a transcript as part of that process. But there's also dual enrollment that happens. So students, and we're seeing a big trend in dual enrollments. I was meeting with the University of Louisiana, the Board of Regents, and there's legislation being proposed that the state would fund those associate's degrees that students could get while they're still in high school as a way to encourage people into higher education. They have technologies that manage that dual enrollment. A lot more course sharing that's going on nowadays. A student may take some classes at Riverside Community College while they're home in the summer, while they're going to Berkeley in the winter, and they want to be able to transfer those credits to apply towards their degree. They have a lot of technology that does that. We are also working from an LMS perspective on how we make those transitions much more seamless. So we believe there's a suite of products that we can cross-sell to make that a lot easier and simpler. In addition to the fact that they have, they bought a company that was international, but they haven't had a sales team. So we're, you know, there's an opportunity for us to use our sales team to sell their solutions into international markets, as well as they just have a very small presence in K-12. And again, they have solutions that help students that are looking to apply for college and things like that that we'll be able to help drive just from a go-to-market presence that we have. Really helpful. So cross-sell, not in guidance. What about on the cost side? So we have built just some modest cost synergies into the guide. Now, most of those cost synergies will be realized in 2025. So it is actually a margin. It will decrement our margin in the short term, dilutive in the short term, but we expect it to be marginally creative going into 2025. That's because, near term, you're kind of operating somewhat independently, and then. And then we're bringing it together, yep. Perfect. Wanted to follow up on something that you mentioned related to sort of the trajectory of organic growth in higher ed around the sales cycles. We've talked about it on some of the calls, but was hoping you could kind of revisit and see if there's an update there just around the topic of elongating sales cycles. You know, what's, I think the reason that we've heard sometimes is around schools evaluating their digital transformation strategies. Like, why is that more relevant now than six months or a year ago? Yeah. And it comes back to the point I was making earlier is we had a lot of noise during the pandemic, right? There was a lot of stimulus dollars in the system. There were a lot of, you know, I think during 2021, enrollments declined like 17% or something, double digits, right? And it took until kind of middle, you know, this budget cycle for institutions to really understand what is the new normal as far as what's it going to look like going forward, right? And so we've kind of seen this recalibration, right, that they're going through right now and trying to figure, okay, now I understand, you know, where my budgets are. I understand what enrollments are looking like, you know, from a steady state perspective. And I recognize that I've got to figure out how to go get more sources of revenue. And so they're really taking a step back and taking a breather and saying, hey, let's figure out what that strategy looks like. Rather than, you know, go buy, let's, you know, let's go replace our LMS. Maybe we should be thinking about this and what's our larger digital transformation strategy and what kind of platform do we want to take us to, you know, because again, these are very sticky products, right? You know, it's, you know, they're making decisions that are decades-long decisions. And so they're taking their time to make those decisions. And so that's what they're telling us and that's what we're hearing. The nice thing is we're in those discussions because we are that critical infrastructure, you know, the core infrastructure that they use for teaching and learning. And so we're having a lot of those conversations. Our pipeline, we had, you know, the most deals and the largest deal size that we've had since 2020 this last year. Even though those deals are taking longer to close, there's still a lot of activity going on. Okay, got it. Coming back to M&A, it's been an important part of your strategy and, you know, overall growth. So what should we expect, you know, now having done Parchment? Like, what should we expect from M&A looking ahead? So, I mean, our number one focus right now is integrating Parchment, right? Understanding the go-to-market, what the 2025 go-to-market's going to look like, helping them continue with their momentum and to be successful, identifying where those cross-sell opportunities are going to be. That being said, as you pointed out, acquisition is an important part of our overall strategy for both growth as well as positioning our platform. And so we've got a very active process. We've got a corporate development team that is still, you know, out meeting and we're talking to people. We won't do another Parchment-sized acquisition. But because of, you know, because we are our free cash flow margins, right, we generate a lot of cash. We'll delever pretty rapidly after the, you know, I think our target is to be at, you know, 3.5x levered by the end of the year. It does create opportunity, you know, for us from a capital allocation perspective to continue to look at, you know, technology that we think is going to move us forward. Got it. I'll ask a couple more and then see if anyone has questions in the audience. So you're talking about strong cash flow generation, capital allocation. We talked about M&A and deleveraging. On the topic of buybacks, just given your float, are like, how is that potential or is that off the table? You know, you never say never. I think right now we're focused on, let's go execute from a business perspective. You know, we have low float. We have a concentrated shareholder who understands, you know, that that's probably holding us back. And so we'll just be looking at what's the best way to get more float and, you know, more trading volume in the stock before we, you know, we think about buybacks and those types of things. Okay, got it. Anything more to add to that topic around the concentrated ownership? Just thinking about, you have a new CFO, Peter Walker, who's publicly mentioned like one of the things that attracted him to the opportunity is capital markets. And yeah, just wondering if anything else to kind of say around that. Yeah, you know, it is one of the reasons why Peter was such an attractive candidate for us when we were hiring. So his experience in the public markets, his work in the past of helping a concentrated shareholder sell down their position are all experience that we really valued bringing into the company. So, you know, I would read into that that it's understood by both the management team as well as our investor the importance of liquidity over time. And Peter's going to be a great help with that. Very clear. Any questions in the audience? All right. Okay, there's one brave. Hi, thank you. To go back to your discussion about longer sales cycles earlier, who are the key decision makers that you guys are usually pitching to or selling to in an institution? It's a great question because when the discussion is just the learning management system, it's usually the provost or the CIO. As we start to talk about these bigger strategic issues about how am I going to get more students into my institution, right, that maybe aren't the degree seeking, it does uplevel the discussion. So we ended up with more discussions with university presidents or chancellors. So it does move us up in the decision-making process, which again, you know, does slow down that process a bit. It's a great question. You mentioned a preference for M&A and building the business over shareable purchases. Can you talk about your value creation framework for M&A, how you think about return thresholds and accretion dilution, et c? Yeah. So, you know, our, you know, I'll start with, you know, our target leverage is to be kind of in that 2-3 times is where we're targeting. But we'd be willing, like we did with Parchment, to jump up if we could, you know, to about 4 times if we're and be as long as we can see a clear path to deleveraging really quickly. We look at, we start with, you know, a strategic fit and does it help us push our platform strategy forward? Does it open up new buyers or new markets with Parchment? We know that as non-traditional becomes a bigger part of the decision-making process, the registrar has to get involved, which is Parchment has great relationships there. So how does it help us in our overall strategy? And then, just from a valuation, value creation, you know, we are looking to buy it at multiples that are creative, you know, that we can see there's a multiple arbitrage for us. We start looking at our EBITDA multiples as well as revenue multiples and that we think that typically there needs to be some, you know, longer-term margin accretion on the bottom line in particular that we feel like we can leverage our go-to-market or our management or that in order to make them much more efficient from a cash generation perspective. Steve, a while back, we, I guess when Anthology and Blackboard combined, we were talking about if it makes sense to have the LMS under the same roof as the student information system and looking at PowerSchool and Schoology. Kind of the answer was it doesn't. I think you did an acquisition of an integration player, Kimono. Kimono, that's right. And then we see the acquisition of Parchment, which is a different end buyer within the academic institution. And so just wondering if your perspective has changed. Like previously, most of the M&A was around the classroom teaching and learning. Parchment gets outside of that. It opens up TAM. But should we expect to see maybe more openness to going after the broader IT budgets within academic institutions? Yeah, the way to think about it is we are focused on the teacher and the learner, right? And so from that perspective, you know, we, you know, there may be different buyers that are primarily dealing with the teacher or the learner. So for instance, you know, the registrar is a lot about student interaction, right? Where we haven't focused is those kind of administrator-teacher relationships, right? So like a student information system is a lot about how do I generate report cards? How do I, you know, how do I report up to the state as far as, you know, enrollment trends, things like that? Our strategy has been for those, you know, or it's payroll management for teachers. It's, you know, all of the backend stuff is not an area that we're spending much time looking at at all. But if it does have a tight relationship with the learner or the teacher, that's where, you know, that interaction, then that's where we focus. And so Parchment really is about how do you document a learner's record? And ultimately, we believe over time the learner, that learner record right now resides with the university, but we believe over time there's this concept of a comprehensive learner record is going to reside with the learner. So as they go from that community college at Riverside Community College and then they go to Berkeley and then they go do a, you know, they get a certificate from AWS Academy, that follows them rather than them having to point everybody back to every individual learning institution that they've talked to. That's why that was so important to us is to be that system of record of what learning has taken place as we've been facilitating the interaction and the interactions that happen in that learning process. Excellent. We are out of time. We'll have to find out about margin expansion at Investor Day coming up. Investor Day in New York City next week. Everybody's invited. You'll get a chance on Tuesday. You'll get a chance to meet our President and COO, our Chief Product Officer, Chief Customer Experience Officer, as well as CFO and myself. Awesome. Thank you.